Finance ministry urges higher inflation target for policy rate flexibility

The Finance Ministry suggested adjusting the inflation target for next year to a range of 1.5 to 3.5%, up from the current 1 to 3%, to grant the Bank of Thailand (BoT) more flexibility in lowering the policy rate.

A ministry source, who wished to remain anonymous, indicated that this change would enable the central bank to reduce the policy interest rate, encouraging inflation to remain within the new target range.

The source noted that the ministry is advocating for a policy rate cut to align with the Federal Reserve’s recent 50 basis points reduction.

However, the BoT might consider such a reduction too drastic. The source added that a 25 basis points cut should be the minimum considered.

“The belief that interest rate cuts have a slower impact than fiscal policy is incorrect. When the interest rate is lowered, 84 million loan accounts in Thai financial institutions will immediately see a reduction in their interest burden.”

Finance Minister Pichai Chunhavajira is set to discuss the inflation management framework for 2025 with the BoT later this month, with plans to present their recommendations to the Cabinet for implementation in 2025.

Inflation concerns

The central bank is reportedly hesitant to lower the policy rate due to concerns about potential inflation increases, despite the general inflation rate being below the regulator’s lower limit. The source mentioned that the central bank might expect the headline inflation rate to fall within the current framework by the end of the year.

The source also believes the BoT is unlikely to modify the inflation target, viewing the existing framework as appropriate for the recovering economy. However, a policy interest rate reduction might still be on the table, according to the source.

According to the source, the ministry’s push for an adjusted inflation target is driven by the prolonged period of low inflation, which is seen as a hindrance to economic recovery, particularly in trade and investment.

“The ministry wants a lower policy rate to align with the interest rate policies of other countries. Higher domestic interest rates attract capital inflows seeking better returns, causing the baht to appreciate, which negatively impacts exports and tourism.”

Recently, the baht strengthened to 32.15 per US dollar, nearing a recent high of 32.13 in 2022.

Bangkok Post reported that the source identified three main factors contributing to the baht’s appreciation: investments seeking higher returns due to relatively higher Thai interest rates, foreign capital inflows into the Thai stock market, and revenue from exports.